Ahead of the Bell: Brookfield Office Properties

Brookfield Office Properties could be under pressure Monday after Citi downgraded the company and lowered its price target, citing the expiration of a lease from a major tenant.

Other analysts have been too slow to lower their outlook for the real estate investment trust, analysts with Citi Research said in a research note. There may be some disappointment when Brookfield reports its fourth-quarter earnings on Friday, they said.

The analysts lowered their rating on Brookfield to "sell" from "hold" and reduced their price target to $15. Brookfield closed Friday at $17.15.

Brookfield said as early as 2009 that its single biggest corporate lease will expire in the fourth quarter of 2013: Bank of America/Merrill Lynch's occupancy of 4.5 million square feet at the World Financial Center in lower Manhattan. Of that, 3.2 million square feet has not been released.

In all, 4.8 million in Brookfield leases are set to expire this year without replacement tenants, about 19 percent of the company's current lease portfolio, according to public filings.

New York's office leasing market has been slow as banks continue to downsize and many other employers remain reluctant to hire. That will make it harder for Brookfield to replace departing tenants at comparable rents, the analysts said.

"While this is 'well known,' we have found that the public markets has (sic) heavily discounted vacancy when lease-up outlook is unclear," they said. They said Brookfield has a strong portfolio and good management, but "its challenges reflect a large lease maturity amid soft market conditions."

The analysts noted noted that another big office REIT, Vornado Realty Trust, did not see it share price decline until after major tenants had moved out, even though the departures had been announced much earlier.

Brookfield has gained 10 percent since hitting a recent closing low of $15.43 on Oct. 31.

The Citi anlysts expect that in 2013 Brookfield's Funds From Operations, or FFO, will be $1.01, far below the average $1.12 forecast by analysts in a FactSet survey. FFO is a measure of cash flow generated by a REITs' holdings.

Analysts tend to evaluate REITs based on their projected near-term income because share value tracks their income closely. REITs must return most of their profits to shareholders in the form of dividends in exchange for receiving certain tax exemptions.

The Citi analysts said Brookfield may have to cut its dividend in the fourth quarter as the impact of the lease expirations is taken into account. The company faces additional risks because it operates with an unusually high ratio of borrowed money, they said.

Brookfield is based in New York and Toronto, and trades on the New York Stock Exchange. It owns, develops, and manages an office portfolio focused on major North American cities, including New York, Boston, Washington, Toronto, Calgary, Denver and Minneapolis.